Skill Premium

Trade liberalization in the late eighties and early nineties in Latin America was accompanied by increases in skill premiums and wage inequality, and in several countries in overall income inequality, a result unexpected by many. Further, as shown in the paper, observed effects on poverty varied widely across countries where wage and income inequality increased or remained essentially unchanged. This paper argues that this was mainly the result of four factors: (1) relative factor endowments, as most Latin American countries are rich in natural resources (which, are in general complementary with capital and skills) and were more capital abundant than other developing countries with large pools of unskilled labor, such as China and India, that were already integrating into the world economy by the time of Latin American trade liberalization; (2) dynamic effects of trade that led to an acceleration of skill-biased technical change and Schumpeterian creative destruction, which led to an increase in demand for skills in most industries; (3) initial conditions and contemporary events that make predictions based on a simple factor abundance model difficult to generalize; for example the pre-reform structure of protection was biased towards unskilled intensive sectors in most LAC countries and tariff reductions naturally led to a relative increase in demand for skills, but differences in consumption bundles across income groups and exchange rate policies also complicate predictions; (4) the impact that trade reform had on imperfectly functioning labor markets, such as potential transitions in and out of unemployment, informality, as well as income volatility are likely to affect and sometimes change the direction of the impact of trade reforms on income inequality and poverty. Finally, the paper shows that the effect of trade on poverty (and income inequality) depends largely on other policies being implemented simultaneously, and that the impact of trade on poverty reduction can be significantly enhanced (and the effects on inequality mitigated) by policies that increase the provision and access to skills and other productive assets for the poor. * We are greatly indebted to

Technical Change and the Wage Structure During the Second Industrial Revolution: Evidence from the Merchant Marine, 1865-1912 * Using a large, individual-level wage data set, we examine the impact of a major technological innovation-the steam engine-on skill demand and the wage structure in the merchant shipping industry. We find that the technical change created a new demand for skilled workers, the engineers, while destroying demand for workers with skills relevant only to sail. It had a deskilling effect on production workable -bodied seamen (essentially, artisans) were replaced by unskilled engine room operatives. On the other hand, mates and ablebodied seamen employed on steam earned a premium relative to their counterparts on sail. A wholesale switch from sail to steam would increase the 90/10 wage ratio by 40%, with most of the rise in inequality coming from the creation of the engineer occupation.

There is no empirical evidence that trade exposure per se increases child labor. As trade theory and household economics lead us to expect, the crosscountry evidence seems to indicate that trade reduces or, at worst, has no significant effect on child labor. Consistently with the theory, a comparatively well-educated labor force, and active social policies, appear to be conducive to a reduction in child labor. For countries with a largely uneducated workforce, the problem is not so much globalization, as not being allowed to take part in it.

Demand for less-skilled workers plummeted in developed countries in the 1980s. In open economies, pervasive skill-biased technological change (SBTC) can explain this decline. SBTC tends to increase the domestic supply of unskillintensive goods by releasing less-skilled labor. The more countries experiencing a SBTC, the greater its potential to decrease the relative wages of less-skilled labor by increasing the world supply of unskill-intensive goods. We find strong evidence for pervasive SBTC in developed countries. Most industries increased the proportion of skilled workers despite generally rising or stable relative wages. Moreover, the same manufacturing industries simultaneously increased demand for skills in different countries. Many developing countries also show increased skill premiums, a pattern consistent with SBTC.

The paper studies the long-term development of the skill premium of construction workers in Europe in a global perspective. It shows that this price of human capital declined sharply between ca 1350 and 1450, and, in particular in the North Sea region, remained on a relatively low level since. It is also demonstrated that in other parts of Eurasia -with the possible exception of parts of China -the skill premium was much higher than in Europe. These developments and regional patterns are explained using insights from human capital theory, focussing on the role played by interest rates and by the efficiency of institutions for the training of apprentices. It is argued that the low skill premium characteristic of western Europe in the early modern period is the result of favourable conditions for human capital formation in general, and that high levels of human capital formation in early modern Europe help to explain the 'Great Divergence' between Europe and the rest of Eurasia during the 19 th century.

This paper examines the interactions between household matching, inequality, and per capita income. We develop a model in which agents decide whether to become skilled or unskilled, form households, consume and have children. We show that the equilibrium sorting of spouses by skill type (their correlation in education) is increasing as a function of the skill premium. In the absence of perfect capital markets, the economy can converge to different steady states, depending upon initial conditions. The degree of marital sorting, wage inequality, and fertility differentials are positively correlated across steady states and negatively correlated with per capita income. We use household surveys from 34 countries to construct several measures of the skill premium and of the degree of correlation of spouses' education (marital sorting). For all our measures, we find a positive and significant relationship between the two variables.

The supply and price of skilled labor relative to unskilled labor have changed dramatically over the postwar period. The relative quantity of skilled labor has increased substantially, and the skill premium, which is the wage of skilled labor relative to that of unskilled labor, has grown significantly since 1980. Many studies have found that accounting for the increase in the skill premium on the basis of observable variables is difficult and have concluded implicitly that latent skill-biased technological change must be the main factor responsible. This paper examines that view systematically. We develop a framework that provides a simple, explicit economic mechanism for understanding skill-biased technological change in terms of observable variables, and we use the framework to evaluate the fraction of variation in the skill premium that can be accounted for by changes in observed factor quantities. We find that with capital-skill complementarity, changes in observed inputs alone can account for most of the variations in the skill premium over the last 30 years.

International trade theory is a general-equilibrium discipline, yet most of the standard portfolio of research focuses on the production side of general equilibrium. In addition, we do not have a good understanding of the relationship between characteristics of goods in production and characteristics of preferences. This paper conducts an empirical investigation into the relationship between a good's factor intensity in

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

Mexico experienced a tremendous expansion of its export-processing maquila sector during the 1990s. At the same time, a large proportion of its labor force remains employed in the informal sector. Since one of the main objectives of the maquiladora program was to increase formal employment, we study how the rapid increase in maquiladora activity has affected labor market outcomes in Mexico. We develop a heterogeneous firm model with imperfect labor markets that captures salient features of the Mexican economy such as the differences between maquila and non-maquila manufacturing plants and the existence of an informal sector. We calibrate the model's parameters to match key cross-sectional moments characterizing the Mexican economy. Our quantitative model indicates that the expansion of the maquila sector during the 1990s produced an increase in informality of 0.9% and a reduction in the skill premium and overall welfare of 2.7% and 3.7%, respectively. A counterfactual experiment in which we shut down the informal sector completely results in a reduction of Mexican welfare of 33.5% relative to the equilibrium with an informal sector. JEL-Code: F120, F140, F160, F230, O240.

The returns to schooling and the skill premium are key parameters in various fields and policy debates, including the literatures on globalization and inequality, international migration, and technological change. This paper explores the skill premium and its correlation with exports in Latin America, thus linking the skill premium to the emerging literature on the structure of trade and development. Using data on employment and wages for over seven million workers from sixteen Latin American economies, the authors estimate national and industry-specific returns to schooling and skill premiums and study some of their determinants. The evidence suggests that both country and industry characteristics are important in explaining returns to schooling and skill premiums. The analyses also suggest that the incidence of exports within industries, the average income per capita within countries, and the relative abundance of skilled workers are related to the underlying industry and country characteristics that explain these parameters. In particular, sectoral exports are positively correlated with the skill premium at the industry level, a result that supports recent trade models linking exports with wages and the demand for skills. JEL CODES: F13, F14

This paper examines the interactions between household matching, inequality, and per capita income. We develop a model in which agents decide whether to become skilled or unskilled, form households, consume and have children. We show that the equilibrium sorting of spouses by skill type (their correlation in education) is increasing as a function of the skill premium. In the absence of perfect capital markets, the economy can converge to different steady states, depending upon initial conditions. The degree of marital sorting, wage inequality, and fertility differentials are positively correlated across steady states and negatively correlated with per capita income. We use household surveys from 34 countries to construct several measures of the skill premium and of the degree of correlation of spouses' education (marital sorting). For all our measures, we find a positive and significant relationship between the two variables.

Abstract: This Paper examines cross-country variations in the return to schooling for men and women and considers some of the stylized facts that have emerged from the extensive international literature on private returns to schooling. We examine the relationship across countries between these returns and a range of controls that can be grouped into three broad areas (i) supply factors,(ii) demand factors, and (iii) governmental policies and institutional factors. We find that the returns are decreasing in both labor force participation ...

We develop an extended directed technological change model with R&D driven growth to analyze the growth rate, technological-knowledge bias, skill premium and industrial structure, assuming: (i) complementarities between intermediate goods in production, and (ii) internal costly investment. We find that complementarities directly affect equilibrium technological-knowledge bias, both elements influence equilibrium growth rate and neither affects skill premium and industrial structure. We also find that equilibrium skill premium is independent of relative labour endowments, being determined solely by workers' productivities, suggesting that the persisting increase in wage inequality observed in several developed countries over the last decades may have been due to increases in productivity advantages of skilled workers favoured by technological development.

In this paper I consider two symmetric countries/regions which trade in final goods. In each country is active the manufacturing sector and both vertical and horizontal innovation conduced by individuals with heterogenous ability. I show that a more globalized world, as represented by lower iceberg-type transportation cost, spurs human capital accumulation, and widens skill premium within each country. However, it may be the case that globalization reduces the per-capita output growth rate of each region, but has positive effect on output level. Moreover, when a region has larger domestic market it also has higher human capital accumulation, higher skill premium, and higher per-capita mass of product lines, i.e. the country with larger domestic market invents a larger mass of varieties. This implies that skilled labor force residing in larger domestic market benefits of higher consumption flows. I show that even if a country has larger domestic market full agglomeration of either activity does not happen: both the regions remain active in both manufacturing and R&D. I show that the same result hold in the case of localized spillovers and specialized knowledge between regions.

Demand for less skilled workers decreased dramatically in the US and in other developed countries over the past two decades. We argue that pervasive skill-biased technological change, rather than increased trade with the developing world, is the principal culprit. The pervasiveness of this technological change is important for two reasons. Firstly, it is an immediate and testable implication of technological change. Secondly, under standard assumptions, the more pervasive the skillbiased technological change, the greater the increase in the embodied supply of less skilled workers and the greater the depressing effect on their relative wages through world goods prices. In contrast, in the Heckscher-Ohlin model with small open economies the skill-bias of local technological changes does not affect wages. Thus, pervasiveness deals with a major criticism of skill-biased technological as a cause. Testing the implications of pervasive, skill-biased technological change, we find strong supporting evidence. Firstly, across the OECD, most industries have increased the proportion of skilled workers employed, despite rising or stable relative wages. Secondly, increases in demand for skills were concentrated in the same manufacturing industries in different developed countries.

This paper examines the impact of globalization on wage inequality using Chinese Urban Household Survey data from 1988 to 2008. Exploring two trade liberalization shocks, Deng Xiaoping's Southern Tour in 1992 and China's accession to the World Trade Organization (WTO) in 2001, we analyze whether regions more exposed to globalization experienced larger changes in wage inequality than less-exposed regions. Contrary

The returns to schooling and the skill premium are key parameters in various fields and policy debates, including the literatures on globalization and inequality, international migration, and technological change. This paper explores the skill premium and its correlation with exports in Latin America, thus linking the skill premium to the emerging literature on the structure of trade and development. Using data on employment and wages for over seven million workers from sixteen Latin American economies, the authors estimate national and industry-specific returns to schooling and skill premiums and study some of their determinants. The evidence suggests that both country and industry characteristics are important in explaining returns to schooling and skill premiums. The analyses also suggest that the incidence of exports within industries, the average income per capita within countries, and the relative abundance of skilled workers are related to the underlying industry and country characteristics that explain these parameters. In particular, sectoral exports are positively correlated with the skill premium at the industry level, a result that supports recent trade models linking exports with wages and the demand for skills.

Mexico experienced a tremendous expansion of its export-processing maquila sector during the 1990s. At the same time, a large proportion of its labor force remains employed in the informal sector. Since one of the main objectives of the maquiladora program was to increase formal employment, we study how the rapid increase in maquiladora activity has affected labor market outcomes in Mexico. We develop a heterogeneous firm model with imperfect labor markets that captures salient features of the Mexican economy such as the differences between maquila and non-maquila manufacturing plants and the existence of an informal sector. We calibrate the model's parameters to match key cross-sectional moments characterizing the Mexican economy. Our quantitative model indicates that the expansion of the maquila sector during the 1990s produced an increase in informality of 0.9% and a reduction in the skill premium and overall welfare of 2.7% and 3.7%, respectively. A counterfactual experiment in which we shut down the informal sector completely results in a reduction of Mexican welfare of 33.5% relative to the equilibrium with an informal sector. JEL-Code: F120, F140, F160, F230, O240.

characteristics are important in explaining skill premiums. The analysis also suggests that the incidence of exports within industries, the average income per capita within countries, and the relative abundance of skilled workers are related to the underlying industry and country characteristics that explain skill premiums. In particular, higher sectoral exports are positively linked with the skill premium at the industry level, a result that supports recent trade models linking exports with wages and the demand for skills.

The returns to schooling and the skill premium are key parameters in various fields and policy debates, including the literatures on globalization and inequality, international migration, and technological change. This paper explores the skill premium and its correlation with exports in Latin America, thus linking the skill premium to the emerging literature on the structure of trade and development. Using data on employment and wages for over seven million workers from sixteen Latin American economies, the authors estimate national and industry-specific returns to schooling and skill premiums and study some of their determinants. The evidence suggests that both country and industry characteristics are important in explaining returns to schooling and skill premiums. The analyses also suggest that the incidence of exports within industries, the average income per capita within countries, and the relative abundance of skilled workers are related to the underlying industry and country characteristics that explain these parameters. In particular, sectoral exports are positively correlated with the skill premium at the industry level, a result that supports recent trade models linking exports with wages and the demand for skills. JEL CODES: F13, F14

In this paper I consider two symmetric countries/regions which trade in final goods. In each country is active the manufacturing sector and both vertical and horizontal innovation conduced by individuals with heterogenous ability. I show that a more globalized world, as represented by lower iceberg-type transportation cost, spurs human capital accumulation, and widens skill premium within each country. However, it may be the case that globalization reduces the per-capita output growth rate of each region, but has positive effect on output level. Moreover, when a region has larger domestic market it also has higher human capital accumulation, higher skill premium, and higher per-capita mass of product lines, i.e. the country with larger domestic market invents a larger mass of varieties. This implies that skilled labor force residing in larger domestic market benefits of higher consumption flows. I show that even if a country has larger domestic market full agglomeration of either ac...

This paper introduces technological progress into an efficiency wage model, and argues that changes in the rate of technical change affect not only the demand for but also the effective supply of labour. This creates a new mechanism through which technological progress impacts on the wage of skilled workers relative to that of the unskilled. Previous work has argued that an increase in the relative wage would only come about if there were an acceleration in the rate of skill-biased technological change. In contrast, we find that technical change affects the skill premium even when it is 'neutral'. Moreover, the paper shows that slower technical change may also increase the relative wage, allowing us to reconcile the change in the skill premium with the productivity slowdown experienced by OECD countries. The main problem of demand-based explanations of the increase in the skill premium is that they cannot account for the simultaneous increase in the unemployment rates for both skilled and unskilled workers. Our framework emphasises the joint determination of wages and employment, and generates wage and employment patterns that are consistent with the evidence. * We would like to thank participants at the CES-ifo conference on Growth and Inequality for helpful comments on an earlier draft of this paper, which was originally published in discussion paper form as Leith and Li (2001). We would also like to thank particpants at the seminar at the University of Stirling for their comments. All errors remain our own.

During the 1990s Poland, Hungary and the Czech Republic have experienced rapid increases in wage inequality between skilled and unskilled workers and received the largest FDI inflow in Central and Eastern Europe. This paper analyzes whether FDI has contributed to the raise in earning inequality via a change in the skill composition of labor demand in the three countries. While we find that in Hungary and the Czech Republic FDI exerts a positive direct impact on the skill-premium, in none of the countries considered FDI has worsened wage inequality by favoring labor demand shifts.

This paper explores the features of a dynamic multisectoral model that focuses on the relationship between income distribution, growth and international specialization. The model is explored both for the steady-state properties and the transitory dynamics of integrated economies. Income inequality affects the patterns of growth and international specialization as the model uses non-linear Engel curves and hence different income groups are characterized by different expenditure patterns. At the same time income distribution is also reflected in the relative wage rates of skilled to unskilled workers, i.e. the skill premium, and hence the wage structure affects comparative costs of industries which have different skill intensities. The model is applied to a situation that analyses qualitatively different economic development strategies of catching-up economies (a 'Latin American' scenario and a 'East Asian' scenario). 1 This is not to say that non-homothetic preferences and dynamics are not dealt with in the literature. Non-homothetic preferences have been introduced into the analysis of trade and growth in, for example, and in more recent contributions including, for example, . But the insights from those contributions are not introduced into the literature on the effects of trade and technological changes on relative wages. Similarly, although endogenous growth in trade models was analysed in a number of contributions (especially Grossman and Helpman, 1991) and dynamic aspects are emphasized, for example, in , these include mainly the analysis of steady-state properties whereas the study of transitory dynamics is underrepresented. However, see, for example, and Baumol (2000, 2004).

The study analyses the evolution of wages and occupational composition of labour over three centuries, from 1755 to 1914, using a worker-workplace data. The data from one industry offers a unique view on long-run trends in skill composition, wage inequality and occupational wage premiums. A major shift in the production technology, a shift from sail-only vessels to steamoperated vessels, in turn, allows the examination the popular skill-biased technology change (SBTC) hypothesis in a well-defined setting. We find that (i) technological change had both a newskill demanding aspect, showing up as an increase in the demand for skilled engineers, and a skillreplacing aspect, resulting in a decline in the demand for skilled able-bodied seamen and an increase in unskilled engine room operatives, (iii) increasing wage inequality in the latter part of the 18 th century is associated with the emergence of new skilled occupations and rising wages of skilled seamen, (iii) wage inequality evolves slowly over time and there are different, declining and rising phases in wage inequality.

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In this paper, we examine the determinants of educational selectivity in immigration using immigrant stock data for 70 source countries and 21 OECD destination countries, as observed in the year 2000/2001. We develop a variant of the Roy model to estimate the determinants of educational selectivity. Two key findings emerge. First, the effect of the skill premium, which is at the core of the Roy model, can be observed only after we take into account the poverty constraints operating in the source countries. Second, cultural similarities, colonial legacies, and physical distance are often more important determinants of educational selectivity than wage incentives or selective immigration policy.

We address two questions that are central to the literature on the emergence of democracy and economic globalization. First, does democratization foster higher levels of trade and capital account openness? Second, do trade and capital account openness increase the likelihood of democratization? We review the literature in international political economy and comparative politics that has theoretically and empirically addressed these questions. We then conduct some empirical tests in a sample of developing countries to briefly evaluate the empirical relationship between democracy and economic globalization. Our analysis reveals that evidence for the claim that democracy fosters trade and capital account liberalization is robust but that empirical support for the predicted positive effect of economic openness on democracy among developing countries is weak. More theoretical work is needed to clarify the link between democracy and economic liberalization, and to this end we provide poss...

In the last 20 years the within countries income inequality has continuously increased. This is a global phenomenon which is observable both advanced and developing countries. Excessive income and wealth inequalities played a role in the genesis of the recent financial crisis and may impair the recovery of the world economy. The long term trend of rising inequalities is the result of different forces. On the one side technological change modified the demand for labour in favour of skilled workers widening the skill premium in wages. From the other side, globalization in trade and finance have contributed to the problem. In particular, fast financial liberalization seems to be a major source of increased inequalities.

The results suggest that trade reform in Brazil did liberalization in Brazil on wage distribution. They contribute to the growing skill premium through skillexplore three main channels through which trade biased technological chiange, which was partially liberalization could have affected wage distribution:

The rise in income inequality in developing countries after trade liberalization has been a puzzle for trade theory, which predicts the opposite effect. The authors present a model with imported intermediate goods in which the relative wages of skilled labor can rise due to higher imports of inputs or due to skill-biased technological change. The evidence from Peru in the post-liberalization phase in the early 1990s supports the skilled-biased technological change hypothesis. The authors find that most of the decrease in the blue-collar wage share in the manufacturing industries can be explained by the increase in machinery imports that followed liberalization, suggesting that the skilled-biased technology is embodied in imported machinery.

Demand for less-skilled workers plummeted in developed countries in the 1980s. In open economies, pervasive skill-biased technological change (SBTC) can explain this decline. SBTC tends to increase the domestic supply of unskillintensive goods by releasing less-skilled labor. The more countries experiencing a SBTC, the greater its potential to decrease the relative wages of less-skilled labor by increasing the world supply of unskill-intensive goods. We find strong evidence for pervasive SBTC in developed countries. Most industries increased the proportion of skilled workers despite generally rising or stable relative wages. Moreover, the same manufacturing industries simultaneously increased demand for skills in different countries. Many developing countries also show increased skill premiums, a pattern consistent with SBTC.

In a "New Trade" model with endogenous supply of skill, how knowledge difussion through international trade a¤ects growth and skill premium depends on responsiveness of skill supply to technological change. The less responsive is skill supply, the more likely that lower skill-premium accompanies higher growth after opening to trade.

This paper examines the interactions between household matching, inequality, and per capita income. We develop a model in which agents decide whether to become skilled or unskilled, form households, consume and have children. We show that the equilibrium sorting of spouses by skill type (their correlation in education) is increasing as a function of the skill premium. In the absence of perfect capital markets, the economy can converge to different steady states, depending upon initial conditions. The degree of marital sorting, wage inequality, and fertility differentials are positively correlated across steady states and negatively correlated with per capita income. We use household surveys from 34 countries to construct several measures of the skill premium and of the degree of correlation of spouses' education (marital sorting). For all our measures, we find a positive and significant relationship between the two variables.

In the US the skill premium and the nonproduction/production wage differential increased strongly from the late 1970s onwards. Skillbiased technological change, trade with unskilledabundant countries and changes in the (domestic) supply of skilled workers have been proposed as explanatory factors. By the method of eliminating the impossible, skillbiased technological change is argued to be the dominant explanation. This paper shows

International trade theory is a general-equilibrium discipline, yet most of the standard portfolio of research focuses on the production side of general equilibrium. In addition, we do not have a good understanding of the relationship between characteristics of goods in production and characteristics of preferences. This paper conducts an empirical investigation into the relationship between a good's factor intensity in production and its income elasticity of demand in consumption. In particular, we find a strong and significant positive relationship between skilled-labor intensity in production and income elasticity of demand for several types of preferences, with and without accounting for trade costs and differences in prices. Counter-factual simulations yield a number of results. We can explain about half of "missing trade", and show an important role for per-capita income in understanding trade/GDP ratios, the choice of trading partners, and the composition of trade. Furthermore, an equal rise in productivity in all sectors in all countries leads to a rising skill premium in all countries, with particularly large increases in developing countries.

This paper provides empirical assessments of one of the leading explanations for the increase in skill premium in Mexico and Argentina during the 1990s: trade liberalisation. We provide evidence that imports increase skill premium in Mexico, while exports reduce it. In Argentina, overall trade increased skill premium in the early 1990s (the beginning of trade reforms), although it reduced it later in the decade. These results are helpful for a comparison between South-South integration, FTAA or bilateral FTAs with Northern economies as alternative trade policy options for Latin American countries.